America is in deep denial over debt

A downgrade in America’s credit rating is “absolutely merited” given Washington’s “wildly reckless overspending”, says Stephen Miran in the National Review. Last week credit-rating agency Fitch cut the US government’s credit rating one notch from AAA to AA+, citing “a high and growing general government debt burden, and the erosion of governance” after June’s stand-off in Congress over the debt ceiling, which brought America close to default.  

Fitch is the second of the big three rating agencies to have cut the US rating from the AAA “gold standard”, says Rafael Nam on NPR. S&P Global took a similar step in 2011. Just nine countries retain an AAA rating from all three agencies. The public debt-to-GDP ratio in these nations averages 39%, compared with 112% in America. 

The market impact was limited as the downgrade contained “no new information”, say DWS’s analysts in a note. The move was “oddly timed”: it would have made sense for Fitch to act earlier this year when the debt-ceiling fight loomed. Yet Fitch is right to warn that the “policies currently in place put the US on an unsustainable path”.

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Howls of protest

Fitch’s decision to move America from “outstanding” to merely “excellent” provoked wails of protest, says Irwin Stelzer in The Sunday Times. Jason Furman, formerly of the Obama administration, complained that the downgrade was “completely absurd”, with former Treasury secretary Larry Summers labelling it “bizarre and inept”. Treasury secretary Janet Yellen argued that “the American economy is fundamentally strong”. She’s right, which is why continuing to run annual deficits in excess of 5% is indefensible, says Stelzer. While an outright default seems improbable – “Treasury printing presses guarantee that there will always be sufficient dollars” to pay US debts – a “de facto default, paying debt obligations in wildly depreciated dollars” is no longer unthinkable.  

Fitch’s move is a political judgement, says Gillian Tett in the Financial Times. “Even if Washington can theoretically pay its bills and cut its debt, that does not mean it actually will”. Politics are so “polarised that it is hard to imagine Congress taking the sensible steps needed to tackle America’s fiscal problems”. The US has no plan for getting its borrowing under control, says Szu Ping Chan in The Telegraph. The “world’s biggest economy is expected to borrow 5.8% of GDP this year”, according to the independent Congressional Budget Office (CBO). Alarmingly, “deficits are... projected to average 7.3% of GDP every year for the next 30 years, more than double the average over the past half-century”. 

The CBO says that in the past century “deficits have been that large only during World War II and the pandemic”.  

Interest on the federal debt will hit $663bn this fiscal year and is “fast approaching the size of the military budget”, says Michael Lewitt in The Credit Strategist newsletter. David Rosenberg of Rosenberg Research calculates that within a decade annual interest payments will be worth over 20% of federal government revenues, compared with 9% before Covid. Fitch’s downgrade is “a wake-up call to the political class” that “America needs to get its fiscal house in order”.